Risk management
LIQUIDITY RISK Management process
Liquidity risk is monitored in terms of its two components:
䊏in the tradability of the different assets;
䊏in its overall context, whereby liquidity risk is defined at grassroots level as the (in)ability to monitor the asset’s growth and to satisfy treasury requirements without incurring abnormal losses.
In terms of the different assets, the various managers keep a constant watch over the transaction levels of the various instruments in accordance with a variety of indicators (BPI’s market share, number of days to unwind positions, size and volatility of spreads, etc.), although always observing the operating limits set for each market.
At global level, responsibility for liquidity
risk-management strategy is vested in the Executive Committee for Market Risks and the Group’s Finance Division and is founded on the constant vigilance of the exposure indicators. There are no predefined limits but merely guidelines relating to these indicators.
Evaluation of the exposure and management strategy of liquidity risk
The management of the Bank’s funding and liquidity was oriented during 2009 founded on five principal pillars:
䊏diversification of the sources of short-term funding through the increased participation in the Euro Commercial Paper market and in the securities repoG market;
䊏reorientation of the commercial focus on the capture of Customer resources, giving priority to the placing of 2, 3, and 5-year debt issues with Customers at the expense of attracting deposits;
䊏refinancing on the medium and long-term capital market, ensuring the maintenance of the equilibrium between short and long-term resources;
䊏participation in the placing of 12-month funds realised by the European Central Bank in June in December, as a manner of taking advantage of the ability to access liquidity with interesting maturity and cost conditions;
䊏optimising the return on the short-term funding raised, taking advantage of the time-based structure of upward sloping interest rates, but without compromising the liquidity position: the new investments in securities translated themselves into the reinforcement of the portfolio of assets eligible for funding at the ECB, which ensures the self-funding of these positions
Customer resources
2009 saw a continuation of the trend initiated in the previous year of reducing the relative importance of Customer resources in the funding structure.
In 2009 BPI began to favour the attraction of Customer resources through the issue of bonds placed by the commercial network.
The portfolio of bonds placed with Customers climbed in 2009 from 2 102 M.€ to 3 912 M.€ (+ 1 810 M.€), which to a large degree compensated for the 2 162 M.€ decrease in Customer deposits. The latter reflected therefore the transfer to interest-earning investments with longer maturities or which offer some exposure to the debt, equity and commodity markets (unit trust funds and structured productsG).
At the end of 2009, the transformation rate for Customer resources (deposits and debt issues placed with
Customers) was 116%.
Liquidity risk1 Sundry indicators
2009 Degree of transformation of deposits into loans 162.5%
Degree of transformation of Customer resources
in the balance sheet into loans 115.9%
Degree of transformation of stable resources2into loans 66.3%
Table 72
1) BFA activity is not included in the table.
2) Stable resources as defined in Bank of Portugal Instruction 1 / 2000.
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Report | Risk management 113 Refinancing of medium and long-term debt
BPI has resorted to the capital market as a form of diversifying its funding sources. In this respect, it maintains permanently active a Euro Medium Term Notes (EMTN) programme in the amount of 10 000 M.€, a programme of mortgage bondGissues in the amount of 7 000 M.€, and a programme of public-sector bondsG amounting to 2 000 M.€.
In 2009, BPI issued 1 452 M.€ in medium and long-term debt, against total repayments of 1 305 M.€ made during the year.
In July, taking advantage of the stimulus which the start of the ECB’s buying programme of Mortgage Bonds and Public Sector Bonds gave to the primary market for these types of assets, BPI floated an issue of 3-year mortgage bonds totalling 1 000 M.€. This issue was the first operation of its kind realised by Portuguese banks in 2009. This issue had a spread of 97 b.p. relative to the 6-month EuriborGbenchmark.
The remaining amount issued in 2009 corresponded to three private placements, one for 175 M.€ of mortgage bonds fully placed with the European Investment Bank and two senior debt issues amounting to 277 M.€.
Already in 2010, BPI floated a new issue of 5-year mortgage bonds totalling 1 000 M.€ with a spread of 62 b.p. vis-à-vis the 6-month Euribor benchmark, and an issue of 2-year senior bonds totalling 500 M.€ with a spread of 85 b.p. relative to 3-month Euribor.
These issues permit refunding the major portion of the medium and long-term debts repayments to be made in 2010 totalling 2 308 M.€.
The medium and long-term debt repayments projected for 2011 and 2012 total 797 M.€ and 1 873 M.€,
respectively.
Liquidity position in the interbank market
During the second half of 2008, BPI accumulated a surplus liquidity position which generated a creditor position in the interbank money market. This position enabled the Bank to weather with great tranquillity the most turbulent periods experienced in the final four months of 2008 and the beginning of 2009 and which was mirrored in an expressive contraction in liquidity on the short-term funding markets.
In 2009, the gradual improvement in funding conditions in the debt markets ceased to justify the maintenance of a position of this order. BPI also altered its funding structure taking into account the factors affecting the markets (thinning of the capital market, sluggish revival of the interbank market and the ECB’s extraordinary measures), the exposure to liquidity risk and the goal of improving its returns. In this regard, the net creditor position was progressively reduced, either to focus on new lending operations or to meet the programmed repayment of medium and long-term debt.
1) Amount of debt repayments net of the amounts in portfolio on the maturity dates.
Issue and redemption of medium and
long term debt Amounts in M.€
2009 2008
2007 Issues
Senior debt 1 222 150 277
Subordinated debtG 2 400
MLT loans 3 200
Assets securitisationG 4 1 500
Mortgage bonds 5 1 000 1 175
Public-sector bonds 6 150 0
Total debt issues [= Σ 1 to 6] 7 2 322 1 300 1 452 Redemptions1
Senior debt 8 586 1 032 1 131
Subordinated debt 9 105 280 30
MLT loans 10 60 48 144
Total debt
redemptions1 [= Σ 8 to 10] 11 751 1 360 1 305 Amount issued, net
of redemptions [= 7 - 11] 12 1 571 (60) 147 Table 73
Medium and long term debt redemption Amounts in M.€ 2010 2011 2012 > 2012
EMTN bonds 1 1 173 407 250 152
MLT loans 2 79 304 282 247
Mortgage bonds 3 1 000 - 1 000 175
Public-sector bonds 4 - - - 150
Subordinated bonds 5 57 86 341 402
Total [= Σ 1 to 5] 6 2 308 797 1 873 1 127 Table 74
The management of short-term funding began to adopt the diversification of funding sources as one of its main priorities in 2009. To this end, a very active drive was embarked on with a view to reviewing the relationship with banking counterparties. The year saw the return to the securities repo market with an active presence, while activity on the Euro Commercial Paper (ECP) market was stepped up. Security repos surged from 40 M.€ at the end of 2008 to 1 825 M.€ at the close of 2009, while the portfolio of issued ECP expanded from 234 M.€ in 2008 to 849 M.€ in 2009.
BPI resorted to ECB funding for the first time in 2009, within the context of the 1-year liquidity injection operations realised by that entity:
䊏in June, BPI raised 1 500 M.€ in ECB resources at an interest rate of 1%;
䊏in December, BPI raised 1 000 M.€ in ECB resources, with a rate corresponding to the weighted average of the rates prevailing in one-week liquidity injection
operations to be realised during 2010, which introduced uncertainty concerning the final rate to be paid.
The total ECB funding raised of 2 500 M.€ was used to acquire a portfolio of Euro zone countries’ public debt, denominated in euro, so as to take advantage of the differential between long-term and short-term rates, the last-mentioned languishing at particularly low levels.
This portfolio, considering that it can be discounted at the ECB, did not imply a reduction of the financial resources which BPI can access at that institution.
Stemming from the behaviour of assets and liabilities described above, BPI presented at the end of 2009 a gap between assets and liabilities maturing in a period of up to one year of -7.3 th.M.€. (figure now reduced at the start of the new year with the issue of 1.5 th.M.€ in the capital market).
The assessment of the overall exposure to liquidity risk mirrored in the gaps table by maturitiesG, permits the timely identification of the larger time lags and their dynamic cover. In filling the Gap, the Bank will continue to seek reinforcing the weight of Customer resources;
increasing the weight of stable resources tapped from the capital market (using also asset securitisation); and maintaining the diversity of funding sources on the interbank market (by counterparties and financial markets).
Assets eligible for funding at the ECB
As the final source of rebalancing, BPI maintained at the end of 2009 assets capable of transformation into liquidity in operations with the ECB in the amount of 3 620 M.€2.
The permanent maintenance of a portfolio of eligible assets for the ECB has a very important strategic value given that it confers the possibility of, at any moment, accessing short-term funding from the ECB, thereby ensuring a comfortable situation to counter unexpected liquidity shrinkages on the funding markets.
In any event, a few measures of last resort are also envisaged in line with the best Basle practices which suggest the need for an emergency plan to deal with liquidity risk (even though its actual use is most improbable).
1) Includes all currencies; Does not include the activity of offshore branches and BFA. The trading equities and operations were considered “without term”.
2) Amount available at the end of 2009 for additional funding at the ECB.
The total value of the portfolio of these assets net of appreciation and regulatory haircuts and before drawings was 7 893 M.€ (3 975 M.€ more than at the end of 2008). Taking into account portfolio drawings at that date for repo operations with the market or for funding from the ECB itself, in a total of 4 273 M.€, BPI still had re-funding assets at the ECB of 3 620 M.€. The portfolio of eligible assets contains securities collateralised by the Bank’s assets, securities issued by third parties and bank loans.
Liquidity risk
Structural position, at 31 December of 20091 Amounts in M.€ Until 1 year 1 to 2 years 2 to 5 years > 5 years Accumulated gap (7 311.5) (7 663.6) (7 884.7) (4 899.1) Table 75
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OPERATIONAL RISKS